Maruti Suzuki second-most expensive among top auto stocks globally

Mumbai: India’s largest carmaker, Maruti Suzuki India Ltd, is the second-most expensive auto stock among the top 20 global auto stocks after Tesla Motors, with the premium based on a double digit sales growth outlook, and strong valuations for Indian equity markets.

According to Bloomberg’s Best Estimates, Maruti trades at 21.22 times fiscal year 2018 price-to-earnings (P/E), after US’s Tesla Motors, which trades at 33.42 times.

Shares of Maruti Suzuki tested fresh record high of Rs.5,037.90 on Tuesday. They have gained 9.68% since its earnings were announced on 26 July, and are up 8.14% so far this year.

“Maruti’s biggest market is India which has a lot of potential to log volume growth, and has an amazing distribution and service network to back it. Also, irrespective of which fuel we talk about, Maruti has a product in that category,” said Dhanajay Sinha, head of research at Emkay Global Financial Services Ltd.

“Maruti’s high valuation has also a lot to do with the fact that valuation of Indian markets are at a large premium to other markets,” Sinha pointed.

Maruti is also the 15th largest auto company in the world, in terms of market capitalization, which stands at $22 billion. Its market cap is around 45% higher than that of its parent—Japan’s Suzuki Motor Corp.

India’s top auto company’s June quarter profit rose 23%, beating analysts’ estimates, as it benefited from lower material costs and a surge in income from activities other than its core business operations. Its profit growth for the quarter was second only to US’s General Motors—which saw its net profits grow by 63.3%, among the companies that have unveiled their June quarter report cards so far.

Maruti was optimistic about its sales prospects for the year and reiterated last month that it looks to grow its sales in “lower double digit” during 2016-17, outpacing the 8-9% growth estimate for the overall passenger vehicle industry.

Of the 23 brokerages covering the stock, eight have a “buy” rating on Maruti, 13 have a “hold” rating, while two have a “sell” rating, shows Bloomberg data.

According to a 27 July report by Nomura, premiumisation has been the biggest success story for Maruti, which led to a sharp 9% year-on-year increase in domestic average selling prices (ASPs).

Waiting periods of six-nine months for the Maruti’s car models Baleno and Brezza improve the visibility on the potential strong revenue growth ahead, Nomura Financial Advisory and Securities (India) Pvt Ltd. said in the note.

Nomura analysts Kapil Singh and Siddhartha Bera, the brokerage factors in a around 13.5% volume CAGR (compounded annual growth rate) and an 18% revenue CAGR over FY16-19.

“Catalysts such as the implementation of the Seventh Pay Commission and a rural demand recovery led by expected good monsoons may lead to further upside to industry growth,” Nomura analysts added.